August 31, 2010

Okay. So. That happened

The government just spent the nation’s entire health corrections budget for a year refunding investors in a failed rural finance company. The PM and Finance Minister insist that they’re going to realise the value of most of the assets – maybe they will, maybe they won’t: right now the bill is $1.7 billion. Sure, given the alternatives that was probably the least shittiest option – but it’s still pretty shitty. Especially now that the details of SFC’s behaviour are emerging:

South Canterbury Finance (SCF) ramped up its risky real estate loans after it signed up to the Government’s scheme

Bad loans were the main reason for its downfall, and Mr Maier revealed the high risk tactic in an interview on TV3`s Campbell Live programme.

Asked whether it had been cynically exploiting the government guarantee, Mr Maier replied: “It might have been cynical, it might have been merely incompetent… it probably violated a lot of prudent lending criteria.”

At least this solution wiped out the owners of SCF so there’s some minimisation of moral hazard and we won’t see US style hundred million dollar bonuses paid out with taxpayer cash. Still, I’d love to know what advice Treasury were giving the Finance Minister about this liability – and how they intend to protect the taxpayer from further exploitation given that the Deposit Guarantee Scheme is scheduled to extend until 31st December 2011.

Oh, ok – the government has “had advisors in there for 12 months”. So there seems to be an implicit endorsement of SCF’s risk-taking by the government. So either the regulators are bad, or SCF was just doomed in this market.

the scheme was introduced by Cullen. Key and English don’t sound like they’re going to be picking up many votes around Timaru having kicked a populist hero into touch.

Cunliffe is already trying to wip up a bit of populist anger over this. It’s a rather large rat to have to swallow and one does have to think long and hard to see that the greater good argument makes sense. But so much easier to go for partisan politics.

Maier was appointed CEO in December 2009, and he’s talking about the loans made in late ’08 and ’09 under the previous executive.

Maybe Edgeler can confirm, but I think the legislation required for the Reserve Bank to take over regulation of non-bank deposit-takers is still going through parliament? Until then, the Trustee Organisations remain the supervisors.

Another group of people that deserve to get a boot up the arse are the Auditors. They’ve been signing off the accounts of finance companies as ‘true and fair’ for years…

Like the seat English held with a 15,000 majority (and a 34 point magin of the party vote)? Sorry to let the numbers get in the way of a good conspiracy theory, but I can think of less costly, and much lower risk ways of spreading the pork around the Canterbury plains.

Cunliffe is already trying to whip up a bit of populist anger over this.

Bell Tea Bagger, ahoy? If I was advising Bill English, I’d draft a patsy question that would give him the oppotunity to give Mr. Cunliffe a history lesson. I’d also ask Mr. Cunliffe if the then-Health Minister was awake when the Deposit Guarantee Scheme was, presumably discussed in Caucus and signed off on by Cabinet.

I’d draft a patsy question that would give him the opportunity to give Mr. Cunliffe a history lesson

Would that lesson include the fact that more claims have been made on the scheme since Mr English had the opportunity not to extend on 25th of August? Would the question include the discussion on possible systemic risk of our financial system had Mr Cullen not introduced the scheme. Would it also note that the Australians who we have financial and banking CER obligations announced a similar scheme without much warning and that the Government at the time was forced to act (a cascade effect of the Irish doing so a month before)?

The original deposit scheme was introduced under the Public Finance Act when Parliament was dissolved, so I assume the soon to be Nat government was briefed as is the convention along with treasury.

I’m confused. Repaying some 36,000 investors at least their capital isn’t about shoring up votes? As opposed to several hundred thousand other investors (mostly in the North Island) who haven’t a brass razoo to rub between them? The other question is why them and not us?

Cullen and Co did lots of things, good and bad. I’m still waiting for my pony, ok?

I wasn’t intending to criticise Cullen rather to point out that this measure had cross-party support (because it was the least worst option) and the current round of it’s-just-National-buying-off-its-supporters is completely counter to the facts and that I would expect better of Cunliffe. He’s been going on and on about how he’s been reading Interesting Books on economics but when it comes to the crunch he throws what ever he’s learnt away and opts for populism rather than trying to explain a complex situation.

You can piss off with the rat-swallowing argument. The National-led government were receiving advice about SCF well-prior to rolling over the scheme. You can argue that they had to roll it over, but they did so without amending it’s quite bizarrely faulted criteria/scope. And they did this with knowledge of the SCF position. That makes it a conscious decision to include the very probable collapse of SCF within the deposit guarantee scheme. That was probably a good decision on the face of it (for the Canterbury region at least), but it was certainly not sprung on them as a result of the ‘rat’ – it had to have been a calculated position that they adopted. That it is against any sort of right-wing/market oriented principle is just further evidence of National’s centrist (Labour-lite) position and a degree of ‘social responsibility’ I guess…

As for Cunliffe/Goff jumping on the bandwagon, do we really expect anything less of perhaps the least effective opposition in the history of oppositions. It is just another example of that deluded group of figures…

one expects oppositions to make mischief for the govt but sometimes there are bigger issues involved and this is one of them. There’s potential for a lot of anger and resentment. Lots of people lost investments and wont be seeing any govt compensation. It’s a very difficult decsion to have to justify.

Claiming this is all National’s fault when the fault clearly lies with Hubbard is just pandering.

But they aren’t, and cannot from this situation – and haven’t been able to do so on any issue of substance. This is why they are so so ineffective. I am not going to have faith in a Labour party again until they eradicate all members of the previous administration.

Neil, got alionk for Cunliffe’s ‘populism’. All I’ve seen is him basically asking what the government knew and when it knew it. Which seems reasonable enough.

Also, Cactus Kate is worth a read on this. I’m anot a lawyer but she reckons SCF was possibly in breach of the agreement. If true, then the government’s choice to honour the agreement anyway is very much something an opposition should be asking the ‘what did you know and when did you know it’ questions.

All I’ve seen is him basically asking what the government knew and when it knew it. Which seems reasonable enough.

reasonable would be attempting to explain why all this was necessary rather than muttering darkly about govt incompetence. Cunliffe likes to portray himeslf as some sort of intellectual immersed in the cutting edge of economic thinking. But when it comes down to it that all goes out the window.

And with Goff chiming in I think the cheap populism is a reasonable allegation.

Looks like he was muttering darkly from the reading of the bill, but broadly accepted the wider aim of the newer scheme English put forward.

This bill does not outline the eligibility policy; it merely provides the Minister with the authority to determine that eligibility. We have some concerns relating to the policy that is currently being drafted, as was set out in broad terms by the Minister a few weeks ago. The criteria requires that companies have at least a BB credit-rating to be eligible. However, some companies might not be able to obtain a sufficient credit-rating, having insufficient scale to meet the requirements of the credit-rating agencies. The transaction costs of obtaining a rating could also be disproportionately high. This could cause a further shake-out in the non-bank finance sector, resulting in further finance company losses or collapses, taking from mum and dad investors while the big banks move in to mop up the customer base.